Spread betting shares has certain advantages over traditional shares dealing. Two of the advantages are that because you are trading on margin you benefit from increased leverage and your profits are free of tax in the UK. Conversely, when you buy shares through traditional channels you do benefit from having rights as a shareholder.
Another way financial spread betting on shares can be seen as advantageous over traditional share dealing is the relative ease in which a trader can go ‘long’ (buy) or ‘short’ (sell).
{Short-Selling Shares}
When you go short on a share in traditional shares trading many traders see this as almost betting against the general upward trend of the market.
When you short-sell shares through a traditional broker, the process can be lengthy. To go short the investor borrows the shares from a shareholder, sells them immediately and then buys them back at a lower price in the future.
If an investor sells shares that they have not yet borrowed this is called ‘naked’ short-selling. The process of short-selling shares comes under increased scrutiny and often becomes controversial during times of economic uncertainty. The recent move by Germany to ban ‘naked’ short-selling on government bonds, credit default swaps and on shares in its ten leading financial institutions is one example.
It was a bold move designed to help stabilise the financial markets and stop investors from speculating that the condition of many troubled European economies will worsen. It was interesting to note that many leading European countries did not introduce similar bans.
Unfortunately, in the short-term at least, the move had the opposite effect as leading share indexes fell around the world. Analysts and investors worried that placing restrictions on traders was not really the answer to the problems, that Germany might be protecting its banks and that the move was more evidence of a deep-rooted divide in the eurozone on many levels.
How the markets react to this announcement in the next few weeks will be interesting. When you spread bet on shares or any other financial instrument, because it does not involve physically owning the share or instrument it’s up to you to decide whether you think a company’s share price or financial instrument will rise or fall.
The process is simple, you ‘buy’ (go long) if you think the share price will rise and ‘sell’ (go short) if you think it likely to fall.
It’s important to note that while profits can be magnified, so too can losses so always make sure you understand the risks involved.
